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Discipline and Liquidity in the Interbank Market

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    Using 20 years of panel data, I demonstrate that high-risk banks have consistently paid more than safe banks for interbank loans and have been less likely to use these loans as a source of liquidity. The economic importance of this effect was relatively small until the mid-1990s, when regulatory and institutional changes began to impose more of the costs of bank failure on uninsured creditors. Subsequently, interbank-market price discipline roughly doubled, and risk-based rationing effects increased by a factor of six. In imposing this discipline, lenders seem to care most about credit risk at borrowing institutions. Copyright (c)2008 The Ohio State University.

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    Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

    Volume (Year): 40 (2008)
    Issue (Month): 2-3 (03)
    Pages: 295-317

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    Handle: RePEc:mcb:jmoncb:v:40:y:2008:i:2-3:p:295-317
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